Oct 30, 2012

Why is it empty?

I often notice that buildings and retail shops are empty and have been empty for a long time. Why?

I asked myself that question often.

From my decades long business experience I can offer several explanations.

The most common reason I have encountered over many decades is that an inheritance is in dispute.

Typically multiple members of a family who have inherited the property or the tenant's lease are in a fight over share of the property or use of the property. Such family feuds have no time limit and are often perpetuated because "the other person is hurt more than me".

Commonly we are dealing with the relationship between property taxes and capital gains. For many properties, the property tax may be low while the property is being depreciated and unused. The owner intends to sell the property after depreciation has gone on for years and take the entire resulting sales price as capital gains. This happens where the alternative tax might be income tax.

Such tax related cases often involve improving the property and still not using it.

In areas where there is rent control or complex tenant eviction problems, it is common for property to remain unused to avoid the costs of dealing with tenant evictions. The taxes may be easily offset by depreciation and capital gains.

Finally, when multiple properties for investments are part of the portfolio there is the additional possibility that other high yielding asset income is being offset by the tax deductions involved in the property that is being left unused.

There are other unique reasons property is left unused but they are highly particular and I cannot summarize the reasons into a major category. If you have examples, please let me know.

Comments

I often notice that buildings and retail shops are empty and have been empty for a long time. Why?

I asked myself that question often.

From my decades long business experience I can offer several explanations.

The most common reason I have encountered over many decades is that an inheritance is in dispute.

Typically multiple members of a family who have inherited the property or the tenant's lease are in a fight over share of the property or use of the property. Such family feuds have no time limit and are often perpetuated because "the other person is hurt more than me".

Commonly we are dealing with the relationship between property taxes and capital gains. For many properties, the property tax may be low while the property is being depreciated and unused. The owner intends to sell the property after depreciation has gone on for years and take the entire resulting sales price as capital gains. This happens where the alternative tax might be income tax.

Such tax related cases often involve improving the property and still not using it.

In areas where there is rent control or complex tenant eviction problems, it is common for property to remain unused to avoid the costs of dealing with tenant evictions. The taxes may be easily offset by depreciation and capital gains.

Finally, when multiple properties for investments are part of the portfolio there is the additional possibility that other high yielding asset income is being offset by the tax deductions involved in the property that is being left unused.

There are other unique reasons property is left unused but they are highly particular and I cannot summarize the reasons into a major category. If you have examples, please let me know.